Why Government Bond Yields Are Rising: Inflation, Debt & Central Bank Moves Explained

The December 2025 bond-market environment is defining a clear shift: yields are rising globally, driven by inflation pressures, tightening or anticipated tightening in monetary policy, and political risk. Japan leads this narrative with its most dramatic move—both in policy and yields—while the U.S. appears torn between improving inflation data and cautious central bank action. Europe, meanwhile, shows a heterogeneity: France’s yields surged amid political uncertainty, Germany’s inflation appears under control but yields rise with repricing of ECB expectations.

Japan’s move is especially consequential. A rate of 2.07% on its 10-year bond, with intramonth highs at ~2.10%, marks the steepest surge in yields in decades. The BOJ’s policy rate hike to 0.75% from next to zero signals a turn toward normalization, reflecting elevated inflation (oscillating around 2.9-3.0%). Yield curves flatten, and this weakens the carry trade that has benefited global risk assets, and increases borrowing costs domestically for government and corporations.

In the U.S., a 13bps rise in the 10-year yield to 4.15%, even amid a Fed rate cut, underscores that financial markets remain sensitive to forward inflation risk. November’s CPI at 2.7%, below forecasts, albeit during a disrupted data period, gives the Fed room to be more dovish—but vote splits in the December rate decision indicate potential constraints.

Europe’s picture is more mixed. In France, political risk continues to push yields higher, while Germany’s inflation steady at ~2.3% supports expectations ECB will stay cautious. The ECB left key rates unchanged December 18, and across the region, markets appear to be interpreting that inflation may be moderating—but persistent service inflation and external risks limit expectations for aggressive cuts.

Strategic implications: countries with heavy fiscal stressing face rising debt‐servicing costs; investors may rotate toward higher yields and inflation‐protected allocations; monetary policy diverging even among leading central banks increases interest rate dispersion and FX volatility. Moreover, forward guidance will matter: data irregularities (e.g. U.S. CPI gap due to shutdown) introduce risk in policy calibration.

Open questions include: how sustained are inflation pressures globally? Will central banks continue tightening or simply holding? How much do politics (as in France, Australia, Japan) amplify yield swings? Most crucially, how credibly can central banks signal tightening paths without destabilizing markets or derailing growth?